From intrinsic value to 'faith money'

The majority of currency on paper is considered fiat money. Fiat money is money that can be used as tender but does not have a physical commodity, such as gold or silver, linked to it. This type of money can be thought of as having no other value than what is on its paper currency and no other purpose than using it to exchange for services or goods. Fiat money cannot be worth any other object of value. Fiat money has often been referred to as faith money. It gets its name from a Latin definition meaning: "it shall be."

Fiat money represents money that circulates in modern society. Years ago, money was backed by physical commodities. Federal governments created paper and coin money that was linked to a metal or other valuable and that could be redeemed for some value. In the 1970s, the United States begin to see more fiat money circulation. The country discontinued the old-fashioned method of using metals to back up the value of money. Today the value of money is more determined by the rate of supply and demand in a nation.

A negative consequence to fiat money is the lack of value the average consumer feels his or her dollar has; there is no way to account for money with something that has concrete value. Some investors see this type of money system as causing more potential long-term problems in the country's supply than money that is backed with a real commodity.